FINANCIAL REPORT
YEAR ENDED JUNE 30, 2009
RETIREE HEALTH
AND
LIFE INSURANCE PLANS
MUNCIE, INDIANA
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To
The President and Board of Trustees
Ball State University
This financial report presents
the financial position of the
Ball State University
Retiree Health & Life Insurance Plans
at June 30, 2009,
and the results of activities for
the year then ended.
Randall B. Howard
Vice President for Business Affairs
and Treasurer
October 1, 2010
Ball State University
2008-2009
Frank A. Bracken, Indianapolis, IN
Thomas L. DeWeese, Muncie, IN
Marianne Glick, Indianapolis, IN
Frank Hancock, Indianapolis, IN
Richard Hall, Carmel, IN
Hollis E. Hughes Jr., South Bend, IN
Matthew Momper, Fort Wayne, IN
Barbara Phillips, Carmel, IN
Kellie Conrad, Indianapolis, IN
(completed term July 7, 2009)
Nicole M. Vauter, Hebron, IN
(appointed July 8, 2009)
Officers
Thomas L. DeWeese................................................................................. President
Frank A. Bracken .............................................................................. Vice President
Hollis E. Hughes Jr. ….. ............................................................................ Secretary
Richard Hall … ........................................................................ Assistant Secretary
Thomas J. Kinghorn .............................. (completed term June 30, 2009) Treasurer
Randall B. Howard ...... (appointed May 14, 2009; Effective July 1, 2009) Treasurer
University President
Jo Ann M. Gora
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Ball State University
Retiree Health and Life Insurance Plans
Management’s Discussion and Analysis
June 30, 2009 and 2008
Introduction and Overview
The Ball State University Retiree Health and Life Insurance Plans (the Plans) are single employer defined benefit plans,
one of which is considered a trust fund of the University, while the other is considered a variable life insurance contract.
Ball State University (the University) is a public institution of higher education located in Muncie, Indiana. As of the
beginning of the 2008-2009 academic year, the University’s staff and faculty (not including student employees and
graduate assistants) totaled approximately 2,839 full-time and 475 part-time personnel, whereas in 2007-2008 there were
2,819 full-time and 452 part-time personnel and 2,771 full-time and 327 part-time in 2006-2007.
Full-time regular employees of the University are eligible to receive a variety of employee benefits, including vacation, sick
leave, short and long term disability insurance, health, life, and accidental death and dismemberment insurance, pension
benefits, and fee waivers for employees, spouses and dependants. For the 2009 fiscal year, the University recorded
benefits of $68.3 million, plus a $17.7 million estimated value for vacation and sick leave benefits whose usage would be
included in payroll, for a total of $85.9 million. The $68.3 million includes $25.9 million in health insurance for active
employees, $18.6 million in pension contributions, $12.5 million of employer matching payments to Social Security and
Medicare, and $7.5 million in health insurance for current retirees. The University pays 100.0 percent of the required
contributions to pension plans and 75.0 percent of the premiums for the various insurance plans. In addition, employees
are provided the opportunity to set aside additional amounts for retirement through deductions from their paychecks
before taxes. These amounts are then deposited into the 403(b) and/or 457(b) voluntary retirement plans that the
University has established for this purpose.
In addition to providing pension benefits to all regular full-time employees, the University, like many other public and
private employers, also provides health and life insurance benefits to employees who retire from the University after
accruing the required years of service (15 years at age 50 or 10 years at age 60 for those hired before
September 1, 1999). As of June 30, 2009, 936 retired employees (1,002 as of June 30, 2008, and 975 as of
June 30, 2007) were covered by retiree life insurance, while 1,679 retired employees, spouses and surviving spouses
(1,680 as of June 30, 2008, and 1,336 as of 2007) were covered by retiree health insurance. In addition, 896 active
employees (875 in 2008 and 850 in 2007) had fulfilled the age and service requirements for these benefits as of that date.
These retiree benefits have been part of the University’s benefit programs since 1949 (life insurance) and 1952 (health
insurance). As this report will show, the overall financial strength of these programs is excellent and is a strong indicator of
continued coverage for the foreseeable future. This is due in large part to the establishment of the Life Insurance
Continuance Fund (LICF) and the VEBA Trust to help fund future retiree benefits.
The VEBA Trust, the larger of the two funds, was established to finance the cost of retiree health care. In equilibrium,
when the VEBA Trust balance equals the actuarial liability for retiree health care, it would cover 75.0 percent of the total
cost of retiree health care, with the remaining 25.0 percent of the cost continuing to be paid 25.0 percent by the retiree
and 75.0 percent by the University. Of course the percentage of the liability funded is subject to significant volatility in both
the numerator (value of the investments) and the denominator (actuarial liability). While the University will continue to
recognize the annual cost of prefunding their share of the retiree health care benefit over the course of their employees’
careers, the earnings from the VEBA Trust help to offset a portion of this cost. Since the liability, as calculated under
Governmental Accounting Standards Board (GASB) Statement No. 43 rules, is funded 59.4 percent as of the most recent
valuation date of July 1, 2009, the VEBA Trust is already beginning to defray a portion of the health care premiums for
retirees and employees, as well as the University. In other words, because of this funding level, total premiums are lower
than they would be otherwise.
Ball State University is not unusual in offering retiree health benefits. A 2007 survey by the AAUP, financed by the TIAACREF Institute, revealed that 82.0 percent of colleges and universities who responded to the survey offered retiree health
care as a benefit. In addition, a Kaiser Family Foundation survey in 2007 indicated that 98.0 percent of state and local
governments surveyed offered retiree health care benefits to early retirees, and 81.0 percent offered these benefits to
Medicare-eligible retirees.
Management’s Discussion and Analysis
Employer-provided retiree health insurance is a significant benefit for retirees. While the federal government provides the
major health coverage for retirees age 65 and above, there are still significant out-of-pocket costs not paid by Medicare,
such as deductibles, co-pays, dental expenses, and prescription drugs (even with the addition of Medicare Part D drug
coverage). In 2004, Mercer stated in a report entitled “Retiree Health Care: Today and Tomorrow,” that “a fully subsidized
employer-sponsored retiree health care program is worth about 6.8 percent of pay contributed to a savings program over
a career.” Periodically, the news media reports the results of various studies by, for example, Fidelity Investments and the
Employee Benefits Research Institute, which attempt to estimate the amount of savings at retirement age needed for
health care costs, over and above that deemed necessary for maintenance of a current standard of living. These
amounts, depending upon the assumptions used, are always expressed in hundreds of thousands of dollars, which is not
surprising considering the number of health issues typically encountered by senior citizens. This is important to consider
because the broad social implications of having an increasing population demographic unprepared to finance these
obligations must be addressed by leadership in all sectors.
For the years ended June 30, 2009, 2008, and 2007, the cost to Ball State University of health care for all current retirees,
spouses, and surviving spouses was as follows:
2009
Insurance Claims
Administration
$
Total
Less:
Retiree Premiums
$
$
Amount included in Benefits Expense
Less:
Medicare Retiree Drug Subsidy
Net Cost of Benefit to University
2008
9,539,088
183,556
9,722,644
$
2,263,383
$
$
8,806,478
213,301
9,019,779
$
8,304,650
188,521
8,493,171
$
2,459,689
$
2,436,737
7,459,261
1,000,928
6,458,333
$
2007
6,560,090
$
968,156
5,591,934
6,056,434
$
836,322
5,220,112
While there are other ways to calculate the cost, including the Annual Required Contribution (ARC) calculated by the
actuaries and discussed later in this document, these are the actual costs recorded in the financial records of the
University.
For this period, retiree health care as calculated above amounted to 7.5 percent of total estimated benefits (seven percent
in 2008, 6.9 percent in 2007), while pension contributions made by the University amounted to 21.7 percent (22.3 percent
in 2008, 22.0 percent in 2007), and the employer portion of Social Security and Medicare amounted to 14.5 percent
(15.0 percent in 2008, 15.1 percent in 2007). Taken together, 43.7 percent (44.3 percent in 2008, 44.0 percent in 2007) of
total estimated benefits were for retirement purposes. Retiree life insurance, since it is totally paid from the LICF, was not
reflected in the University’s benefit expense.
Funding Strategy
In fiscal year 1979-1980, the Ball State University Board of Trustees established the LICF for the purpose of funding
retiree life insurance benefits through contributions and investment returns. In 1985, a reserve for retiree health care was
established, and in 1988, the balance was transferred to the VEBA Trust established for the purpose of funding future
retiree health care. In fiscal year 1992, the first liability projection by consulting actuaries from Mercer was completed. In
fiscal year 1996, following an extensive study by Hewitt Investment Group, a leading consultant providing investment
advice for clients with predominantly pension assets totaling over $31.0 billion, the Board of Trustees approved a policy
for the investment of the LICF and the VEBA Trust. Following this action, Hewitt was appointed as the investment
consultant for these plans, meeting with the University at least quarterly to review investment results, evaluate and
replace managers when necessary, and recommend further refinements to the policy.
During this time, contributions were made to the VEBA Trust from the University’s self-insured health care plan, other
benefits accounts, and, on occasion, the LICF. In 2004, the Governmental Accounting Standards Board issued Statement
No. 43 – Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans, which took effect for
Ball State University during fiscal year 2006-2007, and Statement No. 45 – Accounting and Financial Reporting by
Employers for Postemployment Benefits Other Than Pensions, which takes effect for Ball State University during fiscal
year 2007-2008. The University’s funding methodology is based on the calculation of the annual cost, or Annual Required
2
Management’s Discussion and Analysis
Contribution (ARC), as defined in these statements. In addition, funds available over and above the calculated
contribution required are contributed to the VEBA Trust in order to bring the funding status closer to the calculated
actuarial liability. As of June 30, 2009, the 1.0 million contributed to the VEBA Trust during the year brought the total
University contributions from date of inception to $62.9 million, while the $29.7 million investment loss for the year brings
to $45.8 million net dividends, interest and realized and unrealized investment gains and losses inception to date. In
addition, to date transfers from LICF of $9.4 million and withdrawals of $4.0 million for claims were unchanged from the
previous year.
The most recent actuarial projection of the retiree health care liability dated July 1, 2009, when compared to the VEBA
Trust established to fund this liability, revealed that the liability is now 59.4 percent funded under GASB rules. This is
lower than the 86.6 percent funding level recorded in 2007, the date of the previous projection, and reflects the lower
balance in the VEBA Trust due to investment losses suffered over the past two years (the investment results will be
discussed in greater detail later in this report). As a result, the ARC, as calculated by the actuaries, is now slightly higher
than the health insurance claims paid by the University, although the Medicare Retiree Drug Subsidy more than covered
the shortfall in 2009, so the University was able to extend its record of fully-funding the ARC each year. Because of this,
premiums to be paid by Ball State University employees and retirees did not have to be increased more than expected for
the fiscal year beginning July 1, 2009. In other words, the well-funded VEBA Trust is resulting in lower premiums than
would have been expected for active employees, retirees and spouses, and the University, given the adverse investment
results experienced.
Unlike pension funds, other employee welfare benefits, like retiree health and life insurance, do not have vesting
provisions. However, the consistent actions of the Board of Trustees, including the establishment of the VEBA Trust that
cannot be used for any purpose other than benefits for employees and retirees, and the high level of funding is the best
assurance that these benefits are secure for the future.
Using this Report
This financial report includes two basic financial statements: the Statements of Net Assets and the Statements of
Changes in Net Assets, prepared in accordance with the aforementioned GASB Statement No. 43. These financial
statements focus on the financial condition of the Retiree Health and Life Insurance Plans and the results of operations,
without consideration of the actuarial liabilities that the Plans are intended to fund. Information on the actuarial liabilities is
revealed in Note F of the Notes to Financial Statements, as well as in the Required Supplemental Information following
the Notes, where the asset balances are compared to the liabilities and the actual contributions are compared to the
Annual Required Contributions.
The financial report also includes management’s discussion and analysis and the report of the independent auditors, in
addition to the financial statements, notes to financial statements, and required supplemental information.
Financial Highlights
Following the decline in the financial position of the Retiree Health and Life Insurance Plans in fiscal year 2008, which was
due primarily to the disappointing eight percent investment losses during that period versus the 18.0 percent gain realized
in 2007, the markets continued to decline for nearly nine more months before finally turning around in the latter part of
March, 2009. The total portfolio had investment losses of 21.8 percent for the fiscal year. When compared to a “blended
benchmark” reflecting the diversity of the portfolio and consisting of the Russell 1000 Value Index, the S&P 500 Index, the
MSCI EAFE Index, the MSCI AC World Index ex-U.S., the Russell 2000 Value Index, the Russell 2000 Growth Index, the
NCREIF Index, the BCGC Intermediate Bond Index, and the BC Aggregate Index, the blended benchmark, which
recorded a loss of nine percent in 2008 and a gain of 17.9 percent in 2007, recorded a loss of 19.4 percent, due primarily
to the overall weakness in the stock market and commercial real estate market.
The Retiree Health and Life Insurance portfolios have a long-term focus on achieving a total return that meets or exceeds
the expected long-term growth in the retiree health and life insurance obligations. This is combined with modest liquidity
requirements. For this reason, modest but limited fluctuations in market value and rates of return are expected in the short
term, with larger fluctuations occurring during certain periods, in order to achieve a greater long-term rate of return. When
compared to other similar categories of plans, the risk posture of this portfolio is greater than the average defined benefit
pension plan, due to the pension plans’ greater and more defined liquidity requirements, but less than the average
3
Management’s Discussion and Analysis
endowment or foundation portfolio, due to the greater flexibility of the endowments and foundations to control their
commitments.
When the returns were compared to the “Hewitt Composite Funds Universe,” which consists of 107 pension plans,
endowments, foundations and other not-for-profit institutional asset pools, with assets totaling $23.6 billion, the average
loss was 5.2 percent less than the Retiree Health and Life Insurance portfolios. In 2008, the benchmark loss was
2.9 percent less than the portfolio, and in 2007 the benchmark gain was 1.1 percent less than the portfolio. Defined
benefit pension plans represent 73.0 percent of the assets of this universe. When compared to the NACUBO (National
Association of College and University Business Officers) Endowment Study for the same time period, the NACUBO
average for endowments of $50.0 million to $100.0 million was a loss of 18.6 percent (3.2 percent loss in 2008,
16.7 percent gain in 2007) and 19.7 percent for endowments of $100.0 million to $500.0 million (2.9 percent in 2008,
18.0 percent gain in 2007). The underperformance of the Retiree Health and Life Insurance portfolios as compared to
these benchmarks is not unexpected given the financial environment and difference in risk profiles. While some of the
underperformance may be attributed to investment selection, a portion can be attributed to the portfolio’s 70.0 percent
allocation to equities vs. the typical pension plan’s allocation of 60.0 percent or less, with most of the balance invested in
less volatile fixed income. For the fiscal year, fixed income benchmarks had positive earnings while all equity benchmarks
were negative.
While the one-year results were disappointing, it should be noted that the investment policy for the VEBA and the LICF
focuses on a five-year horizon, with the expectation that the annualized total return will exceed a customized index made
up of the various sector indexes for the various sectors in the asset allocation policy, as well as rank in the top
50.0 percent of a total pension fund universe. Over the past five years, the combined portfolio returned 1.0 percent, vs.
0.9 percent for the customized index. During that same time period, endowments of $50.0 million to $100.0 million
returned 2.7 percent, and endowments of $100.0 million to $500.0 million returned 2.6 percent. Sectors which tended to
hurt the portfolio’s performance were large cap value equity and real estate. Large cap value equity managers did not
perform as well as large cap core or large cap growth, and the portfolio’s large cap value manager performed worse than
the benchmark. With regard to the portfolio’s investment in real estate, the return, though positive, was much lower than
the benchmark.
Prior to fiscal year 2009, the five-year results were respectable when compared to the various benchmarks. For example,
in fiscal year 2008, the portfolio’s return exceeded every benchmark but endowments of $100.0 million to $500.0 million.
During 2009, the Investment Committee took several actions, including reallocating five percent from the domestic large
cap value manager to the S&P 500 Index fund, investing REIT dividends in fixed income rather than reinvesting in the
REIT, filing a written request to liquidate the REIT investment, and increasing by 2.5 percent the allocation to the
portfolio’s small cap value manager, whose performance met all objectives for the five-year period.
Actuarial liability valuations are performed every two years, and the latest valuation, as of July 1, 2009, revealed that the
total liability for the Retiree Health and Life Insurance Plan is now 61.5 percent funded, vs. 91.2 percent funded according
to the calculations performed as of July 1, 2007. The decline in funding is overwhelmingly due to the adverse experience
in the investment markets over the two-year time period. Nevertheless, the funding percentage still places the Plan among
the best-funded.
The Statements of Net Assets and
the Statements of Changes in Net Assets
The Statements of Net Assets and the Statements of Changes in Net Assets report in summary fashion the financial
position of the individual plans and the total of the two plans, as well as the detail of their financial activities, focusing on
the net assets of the plans. These statements include all assets, liabilities, contributions, investment income, and
expenses, using the accrual basis of accounting.
4
Management’s Discussion and Analysis
The following is a summary of the major components of net assets at June 30, 2009, 2008, and 2007.
Net Assets
June 30, 2009, 2008, and 2007
2009
Retiree
Life
Insurance
Retiree
Health
Insurance
Assets:
Cash and Short Term Investments
Accounts Receivable
Investments
2008
Retiree
Life
Insurance
Retiree
Health
Insurance
Totals
Totals
$
2,903,508
3,152,170
111,052,211
$
325,481
429,246
16,239,570
$
3,228,989
3,581,416
127,291,781
$
9,363,050
4,572,899
132,498,802
$
448,466
423,820
21,739,991
$
9,811,516
4,996,719
154,238,793
$
117,107,889
$
16,994,297
$
134,102,186
$
146,434,751
$
22,612,277
$
169,047,028
Liabilities
$
935,821
$
365,028
$
1,300,849
$
756,567
$
155,750
$
912,317
Net Assets:
Trust
Other
$
114,147,732
2,024,336
$
16,606,896
22,373
$
130,754,628
2,046,709
$
142,837,134
2,841,050
$
22,321,203
135,324
$
165,158,337
2,976,374
$
116,172,068
$
16,629,269
$
132,801,337
$
145,678,184
$
22,456,527
$
168,134,711
Total Assets
Total Net Assets
2007
Retiree
Life
Insurance
Retiree
Health
Insurance
Assets:
Cash and Short Term Investments
Accounts Receivable
Investments
Totals
$
5,560,261
3,408,912
142,717,721
$
185,011
348,908
25,317,740
$
5,745,272
3,757,820
168,035,461
$
151,686,894
$
25,851,659
$
177,538,553
Liabilities
$
718,365
$
380,844
$
1,099,209
Net Assets:
Trust
Other
$
148,827,822
2,140,707
$
25,502,751
(31,936)
$
174,330,573
2,108,771
$
150,968,529
$
25,470,815
$
176,439,344
Total Assets
Total Net Assets
Cash and Short Term Investments consist of cash and fixed income investments maturing within one year and reported
on the investment manager and custodial reports. These were significantly lower in 2009 and 2007 due to large
contributions to the VEBA Trust in 2008 which occurred late in June of that year.
Accounts Receivable consists primarily of accrued interest and dividends and amounts received by Ball State University
but not yet transferred to the retiree plans.
Investments include domestic fixed income, domestic large and small capitalization equities, international equities, private
closed-end Real Estate Investment Trust, and municipal bonds. The amounts shown are at fair value. Although domestic
fixed income had positive returns for all three years, the ending balance is lower in 2009 due to transfers of funds for
rebalancing purposes.
Liabilities are primarily benefits payable at year end.
Net Assets – Trust represents the balances at year end in the VEBA Trust and the LICF.
Net Assets – Other reflects activity taking place outside the VEBA Trust and the LICF. For Health Care, it reflects the
difference between the receivables from Ball State University and the retiree contributions versus the benefits payable
and other liabilities. The lower receivable from Ball State University accounts for the decrease.
5
Management’s Discussion and Analysis
The following is a summary of the contributions, investment income, and deductions resulting in the changes in net assets
for the years ended June 30, 2009, 2008, and 2007.
Change in Net Assets-Condensed
Year Ended June 30, 2009, 2008, and 2007
Retiree Premiums
University Premiums
$
Total Premiums
Medicare Retiree Drug Subsidy
Contributions to VEBA and LICF
Net Investment Income
Benefits
Other Expenses
Increase in Net Assets
$
Retiree
Health
Insurance
2,263,383
6,790,396
9,053,779
1,000,928
(29,747,438)
(9,539,088)
(274,297)
(29,506,116)
$
$
$
$
145,678,184
Net Assets Beginning of Year
Net Assets End of Year
2009
Retiree
Life
Insurance
23,595
72,732
96,327
326,000
(5,280,759)
(968,826)
(5,827,258)
$
116,172,068
$
$
$
22,456,527
$
Totals
2,286,978
6,863,128
9,150,106
1,000,928
326,000
(35,028,197)
(10,507,914)
(274,297)
(35,333,374)
$
$
$
168,134,711
16,629,269
$
132,801,337
Retiree
Health
Insurance
2,459,689
7,562,021
10,021,710
968,156
5,000,000
(12,039,686)
(8,806,478)
(434,047)
(5,290,345)
$
$
$
150,968,529
$
145,678,184
2008
Retiree
Life
Insurance
22,575
67,727
90,302
344,300
(2,276,232)
(1,172,628)
(3,014,258)
$
Totals
2,482,264
7,629,748
10,112,012
968,156
5,344,300
(14,315,918)
(9,979,136)
(434,047)
(8,304,633)
$
168,134,711
$
$
25,470,815
$
22,456,557
176,439,344
2007
Retiree
Retiree Premiums
$
University Premiums
Retiree
Health
Life
Insurance
Insurance
2,436,737
$
7,313,768
Total Premiums
$
Medicare Retiree Drug Subsidy
Contributions to VEBA Trust
9,750,505
Totals
25,528
$
76,584
$
2,462,265
7,390,352
102,112
$
9,852,617
836,322
-
836,322
1,401,000
-
1,401,000
Net Investment Income
21,723,104
3,919,758
25,642,862
Benefits
(8,304,650)
(1,079,695)
(9,384,345)
Other Expenses
Increase in Net Assets
(283,874)
$
25,122,407
$
150,968,529
$
2,942,175
$
25,470,815
125,846,122
Net Assets Beginning of Year
Net Assets End of Year
-
(283,874)
$
28,064,582
$
176,439,344
22,528,640
148,374,762
Retiree Premiums and University Premiums reflect the 25.0 percent-75.0 percent sharing of total premium per University
policy. These premiums are paid into the University’s health and life insurance accounts to help cover claims and
administrative expenses.
The Medicare Retiree Drug Subsidy is paid each year to the University by Medicare in recognition of the fact that the
University’s retiree prescription drug benefit is at least actuarially equivalent to the benefit under Medicare Part D. As a
result, Ball State University retirees covered by the University’s retiree health care plan do not enroll in Medicare Part D.
This subsidy recognizes savings incurred by the Medicare program as a result. The amount is utilized to offset a portion of
retiree and University shares of the premiums for Medicare eligible retirees.
With regard to the Contributions to the VEBA Trust and the LICF, it is the University’s policy to at least fund the total ARC
each fiscal year. In years where additional funds might be available, the University may choose to contribute more than
the ARC, to mitigate against future increase requirements. In 2007, the University’s contribution of $1.4 million was the
estimated amount necessary to fund the ARC. The University chose to contribute $6.0 million to the VEBA ($1.0 million of
which was used to reduce the receivable from the University) for the previous year ended June 30, 2008. In accordance
with GASB 45, which took effect in 2008, the entire $6.0 million was reported as a prepaid expense of the University
toward the funding of the retiree health care liability. In the current year, $1.0 million was contributed to the VEBA Trust,
all of which was used here to reduce the receivable from the University.
University employees who retire under the University’s Early Retirement Program may choose to receive a cash payment
in lieu of retiree life insurance. This payment, which amounts to 40.0 percent of the face value of the life insurance policy
to which the retiree would be entitled, is paid by the University in two equal installments on January 31 of the calendar
year following the calendar year in which retirement takes place and the next succeeding January 31. The University’s
consulting actuaries have determined that this payment constitutes a contribution to the LICF, a payment of benefits, and
a source of funding for the ARC. For the year ended June 30, 2009, this payment totaled $326,000, and for the years
ended June 30, 2008, and June 30, 2007, the payments totaled $344,300 and $288,700 respectively.
6
Management’s Discussion and Analysis
Deductions are almost entirely made up of insurance claims, including the University’s cash payments to early retirees in
lieu of life insurance. Claims are paid out of the University’s health care plan in the case of health insurance claims, and
out of the LICF in the case of life insurance death claims. In addition, estimated claims incurred but not paid are included
in the total deduction.
As of June 30, of each year, actual Investment allocations, including cash and short term investments, were as follows:
Domestic Large Capitalization Equities
Domestic Small Capitalization Equities
International Equities
Private Closed-End Real Estate Investment Trust (REIT)
Domestic Fixed Income (including short term)
2009
2008
2007
44.9%
10.1%
14.7%
10.1%
20.2%
43.1 %
10.3 %
14.7 %
11.2 %
20.7 %
49.7%
10.5%
10.2%
9.6%
20.0%
The asset allocation, which was approved by the Board of Trustees, reflects Hewitt’s research and analysis of Ball State
University’s requirements for returns and tolerance for risk. Optimization studies, comparisons to average allocations for
pension plans, endowments and foundations, as well as prospects for earnings and risk for various asset classes, are
considered. At the present time, as mentioned earlier, the asset allocation reflects a slightly higher risk posture than a
corporate pension plan and a slightly lower risk posture than an endowment or foundation. This reflects the fact that the
University has a fiduciary responsibility to its retirees to provide the promised benefit when needed, even though the
benefit cannot be calculated as precisely as a defined benefit pension plan. It also recognizes that the liquidity needs are
less critical for the Retiree Health and Life Insurance Plans, due to the availability of other sources of funds within the
University if needed. This allocation is reviewed with Hewitt on an ongoing basis and modified by the Trustees as needed.
For the fiscal year, as previously noted, the combined portfolio generated a disappointing overall loss of 21.8 percent,
nd
th
th
which put it in the 92 percentile (87 percentile in 2008, 25 percentile in 2007) of Hewitt’s predominantly pension fund
universe, and exceeded the custom index calculated loss of 19.4 percent. More disappointing was the fact that the
portfolios’ policy objectives were not entirely met, since the annualized returns for the past five years placed it in the lower
half (top 34.0 percent in 2008, top 11.0 percent in 2007) of the Hewitt universe of primarily pension funds, even though the
overall return slightly exceeded the calculated return of the customized index. The one-year and five-year results are
related, since as recently as fiscal year 2008, the five-year results met all of the policy objectives, as did the 2007 results.
The only positive returns in the portfolio for the fiscal year were the fixed income funds. J.P. Morgan Intermediate Bond
Separate Account (VEBA) returned 7.5 percent, which was better than its benchmark, while J.P. Morgan Mid-Institutional
Core Bond (the successor to the Bear Stearns Bond) Separate Account returned 1.6 percent, which was not as good as
its benchmark. It should be noted 2009 was the transition year for the Mid-Institutional Core Bond Separate Account. It is
anticipated that 2010 will provide a fairer measure of the performance of this account.
Of the investment managers and investment products reporting losses, the best relative performances were turned in by
the International Equity Funds, Dodge & Cox International and American Funds Europacific Growth, whose losses were
less than their benchmarks and less than most of the international investment products in the Hewitt Universe, and CRM
Small Cap Value fund, whose loss was also less than its benchmark and most of the small cap value investment products
in the Hewitt Universe. Dodge & Cox Separate Account lost slightly less than its benchmark, but more than most of the
large cap value products in the Hewitt Universe. During the year, the allocation to Dodge & Cox, which had produced
superior returns for most of the decade, was reduced by five percent and reinvested in the Vanguard Institutional Index
Fund, whose performance was two percent better for the year. The allocation to CRM Small Cap Value was also
increased by 2.5 percent during the year to take advantage of its superior performance.
RREEF America REIT II returned a loss that was greater than the benchmark and greater than over half of the Hewitt
Universe. During the year, RREEF was notified, first, that dividends were to be paid out rather than reinvested, and,
second, that the Plans wanted to withdraw the entire investment. Due to the relatively illiquid nature of its investments,
requests for withdrawal of investment funds were put into a queue for satisfaction as funds became available. None of the
investment had been returned as of June 30, 2009.
While the 2009 results were unsatisfactory and resulted in some reallocations as described above, the University and
Hewitt Investment Group believe that the remaining investments are desirable and their long-term performance will
eventually exceed the University’s objectives. As it periodically does, the University, with the assistance of
7
Management’s Discussion and Analysis
Hewitt Investment Group, is reviewing its overall asset allocation strategy and considering the inclusion of additional
investment strategies or managers within the existing strategies.
Required Supplemental Information
In addition to the two required financial statements, GASB Statement No. 43 also requires supplemental information in the
form of two required schedules: the Schedules of Funding Progress and the Schedules of Contributions from University
and Other Entities. Both schedules are intended to show current and prior year amounts so that trends in funding can be
ascertained.
Schedules of Funding Progress
The Schedules of Funding Progress compare the Actuarial Accrued Liability (AAL) to the assets accumulated in the VEBA
Trust and the LICF as of the point in time when the AAL is calculated, in this case July 1, 2009. For health care, the
$114,147,732 net assets in the VEBA Trust are compared to the AAL balance of $192,195,650, which results in an
Unfunded AAL (UAAL) of $78,047,918, or a Funded Ratio of 59.4 percent under GASB Statement No. 43 rules. This
contrasts with the year ended June 30, 2007, when the VEBA Trust net assets of $148,827,822 compared to the AAL
balance of $171,887,451 and an Unfunded AAL (UAAL) of $23,059,629 and a Funded Ratio of 86.6 percent. As
anticipated, the volatile U.S. and world economies have had an effect on the VEBA Trust as unrealized losses from
market depreciation. However, the 2009 ratio of 59.4 percent still exceeds the funding level of similar plans sponsored by
at least 46 states, according to the Pew Center for the States. Since the UAAL amounts to 51.6 percent of covered
payroll, funding the remainder in one year would be a heavy burden, which is why the University intends to fund the
amount over no more than 30 years, and preferably fewer years if circumstances permit.
Life Insurance AAL exceeds the assets in the LICF for the first time since the University began requesting this calculation,
resulting in a Funded Ratio of 82.1 percent. When combined with the Health Care results, the total funded ratio becomes
61.5 percent. To the extent possible, once the LICF again achieves full funding, and without impairing the adequacy of the
LICF, funds will likely be transferred to the VEBA Trust, as has happened on occasion in the past, to help with funding for
retiree health insurance.
Schedules of Contributions from University and Other Entities
These schedules compare actual contributions to the Annual Required Contribution (ARC), which is an actuarial
calculation of “normal cost” each year plus the annual amortization of UAAL. Actual contributions consist, in the case of
Ball State University, of employer-paid claims plus any contributions to the VEBA and/or the LICF. In the case of health
insurance, the actual contributions exceeded the ARC, resulting in a percentage contributed of 116.9 percent. In addition,
the Medicare Retiree Drug Subsidy increased the contributions to 130.0 percent. For life insurance, contributions were
made as cash payments to early retirees in lieu of life insurance, which resulted in 214.3 percent of the ARC being
contributed in 2009.
Economic Factors That Will Affect the Future
The biggest single factor that affects the future of these programs is the pace of health care spending. Health care
providers continue to improve the quality of their services to patients, in many cases curing or managing what was
formerly incurable and beyond management. New technologies related to advances in health care have been bringing
about significant diagnostic and treatment advances. However, all of this has come at a cost that exceeds the general rate
of inflation. When combined with a rapidly aging population, the result has been a rate of increase that has on occasion
been in double digits in the recent past. The current study by the consulting actuaries from Mercer assumes Ball State
University retiree medical costs increasing as follows:
8
Management’s Discussion and Analysis
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026+
Pre-65
Medical
8.00%
7.80%
7.60%
7.40%
7.20%
7.00%
6.80%
6.60%
6.40%
6.20%
6.00%
5.70%
5.50%
5.30%
5.10%
4.90%
4.70%
4.50%
Post-65
Medical
7.00%
6.90%
6.90%
6.80%
6.80%
6.70%
6.60%
6.60%
6.40%
6.20%
6.00%
5.70%
5.50%
5.30%
5.10%
4.90%
4.70%
4.50%
Drugs
8.00%
7.80%
7.60%
7.40%
7.20%
7.00%
6.80%
6.60%
6.40%
6.20%
6.00%
5.70%
5.50%
5.30%
5.10%
4.90%
4.70%
4.50%
Dental
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
4.90%
4.90%
4.80%
4.80%
4.70%
4.70%
4.60%
4.60%
4.50%
4.50%
Administration
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
4.00%
According to the actuaries, the earlier numbers represent recent experience with Ball State University’s retiree population,
while the later numbers consider the implication that the overall economy cannot sustain the current rates of increase in
health care costs. Something will have to change in the way health care is priced and delivered. In all likelihood, it will be
some combination of federal funding and mandates, incentives for healthy lifestyles, rationing of services, plus more direct
consumer involvement and choice in the selection of treatment and the payment of health care expenses. Already we
have seen in recent years the establishment of Medicare Part D prescription drug coverage with subsidies to qualifying
employer drug plans for retirees, as well as high-deductible health savings account health insurance plans that incentivize
members to choose care options based on price as well as other factors. Whatever form this takes, it is hoped that the
effect on the Ball State University plan will be positive.
Since June 30, 2009, the investment markets have improved over where they were, despite continued uncertainty in the
U.S. economy as well as the global economy. The decline in market values of residential and commercial property in the
United States as well as a number of foreign countries has either continued or, where it has reached bottom, has not
recovered. Loan defaults and foreclosures have continued. The result has been slower economic growth in the
United States and elsewhere, which has led to recession, a weak recovery, and continued high unemployment. Further
complicating the picture has been increased spending and borrowing by governments world-wide, leading to fears of
sovereign default on bonds as well as the possibility of inflation. At the same time, the continued slowing of economic
growth has led to fears of deflation. This uncertainty has led to increased volatility in the investment markets. The longer
this uncertainty persists, the more difficult it will be to maintain the current level of funding of the steadily increasing
actuarial liability.
At the same time, the University has embarked upon an ambitious program of health enhancement and wellness for both
active employees and retirees in order to reduce the rate of increase in serious illness and the associated health claims. It
is hoped and anticipated that this effort will reduce health care claims expenditures and premiums for both employees and
the University and reduce actuarial liabilities calculated in the future.
In summary, although there is a great deal of uncertainty in the economy and in the health care arena, Ball State
University employees and retirees nevertheless have benefited from the long-term tangible commitment the University
has made to funding these important retiree benefits. The level of funding that has been achieved to date is the best
assurance that these benefits are secure for the future.
Requests for Information
Questions about any information provided in this report should be addressed to:
Ball State University
Office of Controller and Business Services
AD 301
Muncie, IN 47306
9
2009
Retiree
Life Insurance
Retiree
Health Care
Assets:
Cash and Short Term Investments
Receivables:
Accrued Interest and Dividends
Retiree Contributions Receivable
Receivable from Ball State University
Miscellaneous Receivables
Total Receivables
$
2,903,508
$
192,013
24,436
2,935,721
-
325,481
Totals
$
40,698
181
387,220
1,147
3,228,989
2008
Retiree
Life Insurance
Retiree
Health Care
$
232,711
24,617
3,322,941
1,147
9,363,050
$
975,282
76,790
3,520,827
-
448,466
Totals
$
132,746
435
290,639
-
9,811,516
1,108,028
77,225
3,811,466
-
10
$
3,152,170
$
429,246
$
3,581,416
$
4,572,899
$
423,820
$
4,996,719
$
21,949,836
61,202,918
16,826,966
11,072,491
$
2,931,457
9,013,109
2,416,021
1,878,983
$
24,881,293
70,216,027
19,242,987
12,951,474
$
26,790,111
69,881,962
20,826,196
15,000,533
$
3,731,121
11,975,885
3,259,961
2,773,024
$
30,521,232
81,857,847
24,086,157
17,773,557
Total Investments
$
111,052,211
$
16,239,570
$
127,291,781
$
132,498,802
$
21,739,991
$
154,238,793
Total Assets
$
117,107,889
$
16,994,297
$
134,102,186
$
146,434,751
$
22,612,277
$
169,047,028
$
22,106
913,715
$
365,028
$
22,106
1,278,743
$
20,841
735,726
$
155,750
$
20,841
891,476
$
935,821
$
365,028
$
1,300,849
$
756,567
$
155,750
$
912,317
$
114,147,732
2,024,336
$
16,606,896
22,373
$
130,754,628
2,046,709
$
142,837,134
2,841,050
$
22,321,203
135,324
$
165,158,337
2,976,374
Investments, at Fair Value:
Fixed Income
Domestic Equity
International Equity
Real Estate Investment Trust
Liabilities:
Accrued Expenses and Other Liabilities
Benefits Payable
Total Liabilities
Net Assets:
Held in Trust for Post -Employment
Health and Life Insurance Coverage
Other Net Assets
Total Net Assets
$
116,172,068
$
16,629,269
$
132,801,337
$
145,678,184
$
22,456,527
$
168,134,711
Total Liabilities and Net Assets
$
117,107,889
$
16,994,297
$
134,102,186
$
146,434,751
$
22,612,277
$
169,047,028
See accompanying Notes to Financial Statements. An unaudited Schedule of Funding Progress and Schedule of Contributions from University and Other Entities are presented on page 22.
Financial Statements
Ball State University
Retiree Health and Life Insurance Plans
Statements of Net Assets
As of June 30, 2009 and 2008
Ball State University
Retiree Health and Life Insurance Plans
Statements of Changes in Plan Net Assets
For the Year Ended June 30, 2009 and 2008
Retiree
Health Care
Additions:
Contributions:
Retiree Premiums
Employer Matching Premiums
Medicare Retiree Drug Subsidy
Ball State University Contributions to Fund
Total Contributions
Investment Income:
Interest and Dividends from Investments
Net Gain from Sale of Investments
Unrealized Gains/(Losses) from
Market Appreciation and (Depreciation)
Total Investment Income/(Loss)
2009
Retiree
Life Insurance
Retiree
Health Care
Totals
2008
Retiree
Life Insurance
Totals
$
2,263,383
6,790,396
1,000,928
-
$
23,595
72,732
326,000
$
2,286,978
6,863,128
1,000,928
326,000
$
2,459,689
7,562,021
968,156
5,000,000
$
22,575
67,727
344,300
$
2,482,264
7,629,748
968,156
5,344,300
$
10,054,707
$
422,327
$
10,477,034
$
15,989,866
$
434,602
$
16,424,468
$
3,003,025
(4,369,652)
$
416,900
(37,694)
$
3,419,925
(4,407,346)
$
4,447,192
10,140,042
$
681,861
1,225,752
$
5,129,053
11,365,794
(28,108,499)
(5,640,241)
(33,748,740)
(26,321,660)
(30,419,599)
11
(29,475,126)
$
(5,261,035)
$
(34,736,161)
$
$
115,532
98,931
58,036
(187)
$
34,901
(15,177)
-
$
150,433
83,754
58,036
(187)
$
Total Investment Expenses
$
272,312
$
19,724
$
292,036
$
Net Investment Income/(Loss)
$
(29,747,438)
$
(5,280,759)
$
(35,028,197)
$
(12,039,686)
$
(2,276,232)
$
(14,315,918)
Total Additions/(Deductions)
$
(19,692,731)
$
(4,858,432)
$
(24,551,163)
$
3,950,180
$
(1,841,630)
$
2,108,550
$
9,539,088
183,556
90,741
$
968,826
-
$
10,507,914
183,556
90,741
$
8,806,478
213,301
220,746
$
1,172,658
-
$
9,979,136
213,301
220,746
Total Deductions
$
9,813,385
$
968,826
$
10,782,211
$
9,240,525
$
1,172,658
$
10,413,183
Net Increase/(Decrease)
$
(29,506,116)
$
$
(35,333,374)
$
(5,290,345)
$
(3,014,288)
$
(8,304,633)
Deductions:
Benefits
Administrative Expenses
Actuarial Expenses and Audit Fees
(5,827,258)
$
(2,190,326)
$
(13,924,752)
129,412
124,609
48,998
2,241
$
30,705
55,224
(23)
$
160,117
179,833
48,998
2,218
305,260
$
85,906
$
391,166
Net Assets:
Beginning of Year
End of Year
145,678,184
$
116,172,068
22,456,527
$
16,629,269
168,134,711
$
132,801,337
150,968,529
$
145,678,184
25,470,815
$
22,456,527
See accompanying Notes to Financial Statements. An unaudited Schedule of Funding Progress and Schedule of Contributions from University and Other Entities are presented on page 22.
176,439,344
$
168,134,711
Financial Statements
$
Less Investment Expenses:
Investment Custodial Fees
Investment Management Fees
Investment Consulting Fees
Other Investment (Income)/Expenses
(11,734,426)
(4,097,939)
Required Supplemental Information
This page intentionally left blank
12
Notes to Financial Statements
Ball State University
Retiree Health and Life Insurance Plans
Notes to Financial Statements
June 30, 2009 and 2008
Note A – Significant Accounting Policies
Reporting Entity
The Ball State University Retiree Health and Life Insurance Plans (the Plans) are single-employer defined benefit plans,
one of which is considered a trust fund of the University, while the other is considered a variable life insurance contract.
Ball State University (the University) is a public institution of higher education in the State of Indiana governed by a ninemember Board of Trustees in accordance with IC 20-12-57.5. As part of a comprehensive employee benefits program,
Ball State University provides health and life insurance benefits, in addition to pension benefits, to eligible retired
employees.
Health insurance at Ball State University is a self-funded plan that utilizes third party administrators for health and dental
benefits and for prescription drug benefits. Each year, the Board of Trustees establishes premiums for the next fiscal year,
of which 25.0 percent are paid by the employees and retirees, and 75.0 percent are paid by the University. The premiums
are intended to fully fund all claims, administrative costs, reserve adjustments, and contributions to a VEBA Trust
established to partially fund health care costs for eligible retirees and their beneficiaries. The claims and applicable
administrative costs of current retirees are paid from the self-funded plan, while the contributions to the VEBA Trust are
intended to partially fund claims and administrative costs for retirees in the future. All of these payments count toward the
Annual Required Contribution payment as calculated under GASB Statement No. 43, Financial Reporting for
Postemployment Benefit Plans Other Than Pension Plans.
Life insurance at Ball State University is purchased from CIGNA, with premiums equal to actual claims plus a monthly
administrative charge. Ball State University accounts for the Life Insurance Plan in a manner similar to the Health
Insurance Plan. Each year CIGNA establishes, and the Board of Trustees approves, premiums for the next fiscal year,
and 25.0 percent is collected from employees and retirees and 75.0 percent from the University. The premiums are
intended to fully fund all claims and administrative costs for employees and retirees. CIGNA pays actual claims, and bills
the University for the employees and charges the LICF for the retiree claims and administration. On occasion, excess
funds in the LICF are transferred to the VEBA Trust.
Contributions and Benefits
Retiree premiums, related University match, and federal subsidy are recognized when due. Contributions to the VEBA
Trust and the LICF from the University are discretionary and are recognized when received. Benefits and refunds are
recognized when due and payable, to the extent they can be ascertained, in accordance with the terms of the plan. The
plans are described in greater detail in Note E.
Federal Income Tax Status
Ball State University is exempt from federal taxes under Section 115 of the Internal Revenue Code. In addition, the VEBA
Trust is exempt under section 501(c)(9) and the LICF is exempt as a variable life insurance contract under Section 817(c).
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of
America, the Plans make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of
revenue and expenses during the reporting period. Actual results could differ from those estimates and assumptions.
13
Notes to Financial Statements
Administrative Expenses
Administrative expenses of the Plans are generally absorbed by the University, except that administrative charges from
third party administrators, actuaries and consultants applicable to retiree health care and life insurance and investments
are financed by premiums paid by the University and the retirees.
Commitments and Contingencies
Other than claims incurred but not reported, for which an accrual has been estimated, the Plans have not made any
purchase commitments. There are no contingent liabilities as of the date of the financial statements.
Financial Statements
Due to the methods used to administer these plans, the financial statements reflect all of the activity in the health and life
insurance plans as it pertains to retiree and University shares of premiums, claims, administrative costs, as well as
contributions, investment activity and related costs in the VEBA Trust and the LICF. Balances included in the financial
statements of the University are reflected as receivable from the University.
The financial statements are prepared using the accrual basis of accounting. Premiums from retirees and the University
are recognized in the period they are due, while contributions to the VEBA Trust and the LICF are recognized when paid
by the University. The Medicare Retiree Drug Subsidy is recognized in the period to which the subsidy pertains, with any
unknown amounts estimated based on the amounts known. Benefit claims are recognized in the period incurred and
payable, to the extent they are known or able to be estimated. Actual results will differ from these estimates, and will be
recognized in the subsequent period.
Net Assets
Net assets are composed of two amounts, the larger of which is the amount on deposit in the VEBA Trust and the LICF at
fair value on June 30, 2009. The remaining amount, classified as other net assets, represents assets that have not been
deposited with the VEBA Trust and the LICF as of June 30, 2009.
Note B – Investments
The plans rely on various investment managers hired by the University’s Board of Trustees, with the advice of outside
consultants, to prudently invest the amounts contributed, in accordance with IC 30-4-3.5, the Indiana Uniform Prudent
Investor Act. These investment manager arrangements are in the form of mutual funds, separately managed accounts
with securities in the possession of custodians other than the investment manager, a private investment trust, and a
private closed-end real estate investment trust. Investments are reported by the managers and, in some cases custodial
banks at fair value, which in most cases represents the published market value as of the close of business on the last
business day of the accounting period. Where the value is expressed in currencies other than dollars, the exchange rate
applicable to the date of the market valuation is used. Fixed income securities maturing within one year of the date of the
financial statements are classified as short term investments. The fair value of the investment in the real estate investment
trust (REIT) is based on independent appraisals and internal valuations of recent acquisitions. The REIT publishes annual
audited financial statements.
Purchases and sales of investments are recorded as of their trade date. Dividend income is recognized on the ex-dividend
date. Interest income is recorded as earned.
14
Notes to Financial Statements
The portfolio’s risk exposures are as follows:
1.
Custodial Credit Risk, Deposits – Custodial credit risk for deposits is risk that, in the event of the failure of a
depository financial institution, the VEBA and/or the LICF will not be able to recover its deposits or will not be
able to recover collateral securities that are in the possession of an outside party. All of the cash in the Plans is
invested in money market accounts sponsored by the applicable custodial bank. These accounts are neither
insured nor collateralized.
2.
Custodial Credit Risk, Investments – Custodial credit risk for investments is the risk that, in the event of the
failure of the counterparty to a transaction, the VEBA and/or the LICF would not be able to recover the value of
its investment or collateral securities that are in the possession of another party. Since JPMorgan Asset
Management holds all VEBA Trust investments in the name of the VEBA Trust or its nominee, and Bank of New
York Mellon holds all LICF investments in the name of CIGNA, the investments are not exposed to custodial
credit risk.
3.
Credit Risk – Generally, credit risk is the risk that an issuer of an investment will not fulfill its obligation to the
holder of the investment. This is measured by the assignment of a rating by a nationally recognized statistical
rating organization. The investment policies for the VEBA Trust and the LICF includes limiting securities rated
below A by Standard & Poor’s and Moody’s to 15.0 percent due to downgrades only, with the further stipulation
that securities that fall below BBB (Standard and Poor’s) or Baa (Moody’s) should be sold as soon as possible.
The following tables present the quality ratings of non-government-guaranteed fixed income assets in the LICF and the
VEBA Trust as of June 30, 2009 and 2008.
LICF
Average Credit Quality and Exposure
Levels of Non-Government Guaranteed Securities
Year Ended June 30, 2009
Standard & Poor's
Agency
AAA+
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBBBB
NR
Total
Agency
45,016
$
45,016
$
Percent of All Fixed
Income Assets
1.4%
Mortgage
Backed
Securities
$
1,405,475
72,604
47,656
10,345
26,252
$
1,562,332
Corporate Bonds
Short Term
Long Term
$
$
5,435
24,057
103,558
26,964
46,363
91,249
30,678
271,045
78,178
28,618
15,893
5,601
2,213
$
134,236
$
595,616
4.1%
18.4%
48.3%
Collateralized
Mortgage
Backed
Securities
$
176,009
24,637
$
200,646
6.2%
Asset
Backed
Securities
$
12,867
16,113
10,861
$
39,841
1.2%
LICF
Average Credit Quality and Exposure
Levels of Non-Government Guaranteed Securities
Year Ended June 30, 2008
Moody's Rating
Agency
Aaa
Aa
A
Baa
Agency
148,209
$ 148,209
$
Total
Percent of All Fixed
Income Assets
3.5%
Corporate Bonds
Short Term
Long Term
$
$
108,265
574,297
579,251
17,092
$
$
1,278,905
0.1%
30.5%
15
$
$
Mortgage
Backed
Securities
776,002
565,434
2,704
1,344,140
32.2%
Collateralized
Mortgage
Backed
Securities
$
14,036
506,638
$
520,674
12.5%
Asset
Backed
Securities
$
49,913
8,240
$
58,153
1.4%
Notes to Financial Statements
VEBA Trust
Average Credit Quality and Exposure
Levels of Non-Government Guaranteed Securities
Year Ended June 30, 2009
Federal Agencies
Standard & Poor's
Agency
AAA
A
Total
Bonds
& Notes
$
501,052
105,179
$
Pass
Through
-
$
606,231
$
-
Percent of All Fixed
Income Assets
Standard & Poor's
AAA
AA+
AA
AAA+
A
ABBB+
2.6%
Total
$
Percent of All Fixed
Income Assets
100,511
Foreign
Government
Obligations
$
-
$
$
0.0%
$
0.4%
10,708,496
46.5%
Corporate Bonds & Notes
Short Term
Long Term
$
$
189,866
241,514
307,794
642,652
50,029
2,069,535
50,482
610,581
305,440
BBB
BBBBBNR
Collateralized
Mortgage
Obligations
$
10,693,766
14,730
-
108,879
31,965
28,286
4,536,512
19.7%
0.0%
Foreign Bonds
Short Term
Long Term
$
$
61,610
53,666
32,465
15,668
155,781
-
$
0.0%
$
106,207
425,396
1.8%
Asset
Backed
Obligations
$
1,266,405
-
$
19,782
101,960
1,388,148
6.0%
VEBA Trust
Average Credit Quality and Exposure
Levels of Non-Government Guaranteed Securities
Year Ended June 30, 2008
Federal Agencies
Standard & Poor's
Agency
AAA+
AAA
AA+
AA
AAA+
A
ABBB+
Total
Percent of All Fixed
Income Assets
Standard & Poor's
Agency
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBBTotal
Percent of All Fixed
Income Assets
$
$
Bonds
& Notes
808,327
808,327
2.7%
$
$
Pass
Through
3,858,191
3,858,191
12.8%
Corporate Bonds & Notes
Short Term
Long Term
$
$
354,442
67,304
425,619
50,591
1,203,044
129,945
820,627
29,929
691,039
40,592
423,085
68,973
54,600
34,487
$
251,057
$
4,143,220
0.8%
13.7%
16
Collaterized
Mortgage
Obligations
$
10,557,719
$
10,557,719
35.0%
Foreign
Government
Obligations
$
148,876
$
148,876
0.5%
Foreign Bonds
Long Term
Short Term
$
$
45,380
60,731
131,936
14,605
132,068
109,976
$
106,111
$
388,585
0.4%
1.3%
Asset
Backed
Obligations
$
2,169,099
136,566
$
2,305,665
7.6%
Notes to Financial Statements
4.
Concentration of Credit Risk – Concentration of credit risk is the risk of loss that may be attributed to the
magnitude of investment in a single issuer. Neither the LICF nor the VEBA Trust has a single issuer exposure
that comprises five percent of the overall portfolio.
5.
Interest Rate Risk – Interest rate risk is the risk that changes in market interest rates will adversely affect the fair
value of an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair
value to changes in market interest rates. Interest rate risk inherent in the portfolios of the LICF and the VEBA
Trust are monitored by measuring the weighted average duration of each portfolio. Duration is a measure of a
debt investment’s exposure to fair value changes arising from changing interest rates. It uses the present value
of cash flows weighted for those cash flows as a percentage of the investment’s full price. The effective duration
measures the sensitivity of the market price to parallel shifts in the yield curve. The Investment Policy for the
LICF portfolio states that the total portfolio duration should not deviate by more than one year from the duration
of the Lehman Brothers Aggregate Fixed Income Index. Similarly, the Investment Policy for the VEBA Trust
portfolio states that the total portfolio duration should not deviate more than one year from the duration of the
Lehman Brothers Government Credit Intermediate Fixed Income Index.
The following tables list the effective weighted average duration of fixed income investments in the LICF and the VEBA
Trust at June 30, 2009 and 2008.
LICF
Year Ended June 30, 2009
Fair Value
June 30, 2009
$
478,346
$
45,016
$
729,852
$
1,562,332
$
200,646
$
39,841
$
180,993
$
-
Fixed Income Security Type
U.S. Treasury Securities
Federal Agency Securities
Corporate Bonds
Mortgage Backed Securities
Collateralized Mortgage Backed Securities
Asset Backed Securities
Cash and Money Market
Muncipal Bonds
Percent of
All Fixed
Income
Assets
14.8%
1.4%
22.5%
48.3%
6.2%
1.2%
5.6%
0.0%
Weighted
Average
Duration
(Years)
5.4
8.1
4.4
3.4
2.4
2.2
-
Percent of
Weighted
LICF
Year Ended June 30, 2008
All Fixed
Average
Fair Value
Income
Duration
Fixed Income Security Type
June 30, 2008
Assets
(Years)
U.S. Treasury Securities
$
727,996
17.4%
5.4
Federal Agency Securities
$
148,209
3.5%
9.5
Corporate Bonds
$
1,278,905
30.6%
5.1
Mortgage Backed Securities
$
1,344,140
32.2%
4.0
Collateralized Mortgage Backed Securities
$
520,674
12.5%
4.4
Asset Backed Securities
$
58,153
1.4%
2.1
Cash and Money Market
$
79,980
1.9%
-
Muncipal Bonds
$
21,530
0.5%
5.5
17
Notes to Financial Statements
VEBA Trust
Year Ended June 30, 2009
Fixed Income Security Type
U.S. Treasury Bonds and Notes
U.S. Treasury Strips
Federal Agency Bonds and Notes
US Treasury Infl Idx
Federal Agency Collateralized Mortgage Obligations
Federal Agency Pass Through
Government National Mortgage Assoc Pools
Asset Backed Obligations
Foreign Bonds
Corporate Bonds and Notes
Cash and Money Market
Fair Value
June 30, 2009
$
1,736,317
$
2,566,336
$
606,231
$
108,064
$
8,426,610
$
2,281,885
$
15,397
$
1,388,148
$
425,396
$
4,637,023
$
837,327
Percent of
All Fixed
Income
Assets
7.5%
11.1%
2.6%
0.5%
36.6%
9.9%
0.1%
6.0%
1.8%
20.1%
3.6%
Weighted
Average
Duration
(Years)
5.5
5.7
4.5
1.6
2.7
2.4
2.7
2.2
3.8
3.7
-
Percent of
Weighted
All Fixed
Average
Income
Duration
Assets
(Years)
VEBA Trust
Year Ended June 30, 2008
Fixed Income Security Type
6.
Fair Value
U.S. Treasury Securities
$
3,358,920
11.1%
3.4
U.S. Treasury Strips
$
2,493,430
8.3%
5.4
Federal Agency Bonds and Notes
$
808,327
2.7%
2.9
Foreign Government Obligations
$
148,876
0.5%
0.6
Federal Agency Collateralized Mortgage Obligations
$ 10,557,719
35.0%
4.0
Federal Agency Pass Through
$
3,858,191
12.8%
3.0
Government National Mortgage Assoc Pools
$
21,904
0.1%
2.2
Asset Backed Obligations
$
2,305,665
7.6%
2.1
Foreign Corporate Bonds
$
494,696
1.6%
1.7
Corporate Bonds and Notes
$
4,394,277
14.6%
3.3
Cash and Money Market
$
1,757,875
5.8%
-
Foreign Currency Risk – Foreign currency risk is the risk that changes in exchange rates will adversely impact
the fair value of an investment. Currency risk exposures, or exchange rate risk, for the VEBA Trust and the
LICF primarily reside within international equity investment holdings. The amounts and countries listed are in
addition to holdings within mutual funds in the portfolios. Any hedges through currency forward contracts are at
the discretion of the investment managers.
18
Notes to Financial Statements
VEBA Trust and LICF
Year Ended June 30, 2009
Country
Canada
United Kingdom
Australia
Netherlands
Mexico
Ireland
Switzerland
Japan
$
France
Greece
Israel
Sweden
$
Fixed
Income
172,973
307,035
47,021
104,061
631,089
$
$
Equities
93,024
704,973
805,458
74,001
243,360
872,347
896,441
457,095
211,985
125,866
332,520
4,817,069
VEBA Trust and LICF
Year Ended June 30, 2008
Country
Canada
United Kingdom
Australia
Netherlands
Mexico
Ireland
Switzerland
Japan
France
Greece
Israel
Bermuda
$
China
Taiwan
Germany
Panama
Qatar
$
Fixed
Income
460,404
384,886
14,318
5,162
11,026
4,666
880,461
$
$
Equities
241,738
933,824
1,226,139
163,489
486,515
978,993
2,009,106
832,639
232,441
102,274
168,168
102,274
65,083
130,167
7,672,850
Note C – Derivatives
The investment policy strictly limits derivatives as follows:

Index U.S. Large Cap Equity Mutual Fund Managers – may be used only to provide liquidity and to “equitize”
dividends and other cash flow and may not exceed ten percent of the portfolio.

Active U.S. Small Cap Equity Managers – options and futures limited to covered hedges only.

International Equity Mutual Fund Managers – currency hedging is permitted.
19
Notes to Financial Statements

Fixed Income Managers – limited to pass through mortgage backed and asset backed securities and
PAC I (Planned Amortization Class) CMOs (Collateralized Mortgage Obligations), but interest rate and
prepayment sensitivity of these instruments must be similar to typical bonds of similar maturity and coupon. The
total exposure to derivative securities should not exceed the allocations within the portfolio’s benchmark index.
Derivatives subject to significant price volatility in response to changes in interest rates or prepayment rates,
such as interest-only securities, principal-only securities (POS), Inverse Floaters, Structured Notes, etc. are
prohibited.
Note D – Contributions and Reserves
It is the intent of Ball State University to contribute annually from the Health and Life Insurance Plans an amount at least
equal to the actuarially calculated Annual Required Contribution (ARC). The University utilizes the projected unit credit
funding method to calculate the ARC. Under this method, ARC is calculated by amortizing the unfunded actuarial accrued
liability (which only takes into account credited service as of the valuation date) over 30 years and adding on the Normal
Cost (representing the additional year of credited service earned during the year). The minimum contribution is equal to
the ARC minus actual benefits paid on behalf of retirees and dependants. Additional amounts may be contributed if
available.
Note E – Description of Plans
Substantially all of the University’s regular full-time employees may become eligible for retiree health and life insurance
coverage if they retire from the University after accruing the required years of service (15 years at age 50; 10 years at age
60 for those hired before September 1, 1999). As of June 30, 2009, out of a total of 2,706 (2,956 in 2008) benefits eligible
active employees, 936 (875 in 2008) had fulfilled the age and service requirements for these retiree benefits.
Retiree health care benefits are the same as employee health care benefits (for retirees not eligible for Medicare) or
substantially the same (for retirees who qualify for Medicare). The Plan includes prescription drug coverage and dental
coverage (dental coverage is optional for retirees who qualify for Medicare). Spouses and dependants are eligible for
coverage under the same rules as the employee plan, and unmarried surviving spouses are eligible to retain the coverage
for the remainder of their lifetime. Medicare-eligible retirees and spouses receive supplemental “carve-out” medical
coverage which is coordinated with Medicare Part A and Part B. Dental and prescription drug coverage is the same under
all plans.
For the year ended June 30, 2009, retirees contributed $2.3 million ($2.5 million in 2008) in premiums for health care
coverage to fulfill their 25.0 percent of total premium requirement, while the University contributed $6.8 million
($7.6 million in 2008) as its 75.0 percent requirement. Monthly premiums paid by retirees not eligible for Medicare ranged
from $78.84 for single coverage in the least expensive plan option to $721.48 for family coverage in the most expensive
plan option. Most non-Medicare retirees paid $156.20 per month for single coverage and $405.56 per month for family
coverage. Medicare-eligible retirees and spouses each paid $71.78 for medical and prescription drug coverage and $7.38
if they chose the optional dental coverage. This was in addition to the Medicare Part B Premium.
Eligible employees receive life insurance coverage equal to 103.0 percent of twice the amount of their defined annual
compensation, up to a maximum of $75.0 thousand. Retirees are eligible to receive 50.0 percent of the amount of
coverage they have immediately prior to retirement or prior to reaching age 66, whichever occurs first. Faculty and
professional personnel who retire under the Early Retirement Program have the option of receiving 40.0 percent of the
amount of coverage they are entitled to receive in retirement as a cash settlement in lieu of coverage.
For the year ended June 30, 2009, retirees contributed $23.6 thousand ($22.6 thousand in 2008) in premiums for life
insurance coverage to fulfill their 25.0 percent of total premium requirement, while the University contributed
$72.7 thousand ($67.7 thousand in 2008) as its 75.0 percent requirement. Retirees pay $.07 per $1,000 of coverage per
month, which means the maximum monthly premium paid by retirees is $2.63.
20
Notes to Financial Statements
Note F – Funded Status and Funding Progress
The funded status of each plan as of the most recent actuarial valuation date is as follows:
Schedules of Funding Progress
Actuarial
Valuation
Date
Health
Life
Total
7/1/09
7/1/09
Health
Life
Total
7/1/07
7/1/07
Accrued
Liability
(AAL)
Value of
Assets
$
$
$
$
114,147,732
16,546,332
130,694,064
$
148,827,822
25,238,907
174,066,729
$
$
$
Unfunded
AAL
(UAAL)
192,195,650
20,150,137
212,345,787
$
171,887,451
19,036,901
190,924,352
$
$
$
Funded
Ratio
Covered
Payroll
UAAL as
a % of
Covered
Payroll
78,047,918
3,603,805
81,651,723
59.4%
82.1%
61.5%
$
$
$
151,120,585
151,120,585
151,120,585
51.6%
2.4%
54.0%
23,059,629
(6,202,006)
16,857,623
86.6%
132.6%
91.2%
$
$
$
136,645,256
136,645,256
136,645,256
16.9%
-4.5%
12.3%
Valuations prior to July 1, 2007, were not valued in accordance with GASB Statement No. 43.
Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the
probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality,
and the healthcare cost trend. Actuarially determined amounts are subject to continual revision as actual results are
compared with past expectations and new estimates are made about the future. The Schedules of Funding Progress,
presented as required supplementary information following the notes to the financial statements, present multi-year trend
information about whether the actuarial values of plan assets are increasing or decreasing over time relative to the
actuarial accrued liabilities for benefits.
The accompanying Schedules of Contributions from the University and Other Entities present trend information about the
amounts contributed to the plan by the University and the federal government through the Medicare Retiree Drug Subsidy
in comparison to the ARC, an amount that is actuarially determined in accordance with the parameters of GASB
Statement 43. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost
for each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years.
Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the
University and its eligible employees) and include the types of benefits provided at the time of each valuation and the
historical pattern of sharing of benefit costs between the University and its eligible employees to that point. The actuarial
methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in
actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations.
Additional information as of the latest actuarial valuation follows:
Valuation Date
Acturial Cost Method
Amortization Method
Asset Valuation Method
Actuarial Assumptions:
Investment Rate of Return
Payroll Growth Rate
Healthcare Cost Trend Rates:
Pre-65 Medical
Post-65 Medical
Prescription Drugs
Dental
Administration
July 1, 2009
Projected unit credit
Level dollar over a 30-year closed period (closed basis)
Market Value
7.5% per year compounded annually
4.0% per year compounded annually
8.0% initial / 4.5% ultimate (not applicable to Life)
7.0% initial / 4.5% ultimate (not applicable to Life)
8.0% initial / 4.5% ultimate (not applicable to Life)
5.0% initial / 4.5% ultimate (not applicable to Life)
4.0%
21
Required Supplemental Information
Ball State University
Retiree Health and Life Insurance Plans
Required Supplemental Information
June 30, 2009
Schedules of Funding Progress
Actuarial
Valuation
Date
Health
Life
Total
7/1/09
7/1/09
Health
Life
Total
7/1/07
7/1/07
Accrued
Liability
(AAL)
Value of
Assets
$
$
$
$
114,147,732
16,546,332
130,694,064
$
148,827,822
25,238,907
174,066,729
$
$
$
Unfunded
AAL
(UAAL)
192,195,650
20,150,137
212,345,787
$
171,887,451
19,036,901
190,924,352
$
$
$
Funded
Ratio
Covered
Payroll
UAAL as
a % of
Covered
Payroll
78,047,918
3,603,805
81,651,723
59.4%
82.1%
61.5%
$
$
$
151,120,585
151,120,585
151,120,585
51.6%
2.4%
54.0%
23,059,629
(6,202,006)
16,857,623
86.6%
132.6%
91.2%
$
$
$
136,645,256
136,645,256
136,645,256
16.9%
-4.5%
12.3%
Valuations prior to July 1, 2007, were not valued in accordance with GASB Statement No. 43.
Schedules of Contributions from University and Other Entities
Health Care
Year
Ended
June 30
2009
2008
2007
$
$
$
Annual
Required
Contribution
7,632,201
6,674,483
7,231,271
Percentage
Contributed
116.9%
194.4%
120.5%
$
$
$
22
Federal
Subsidy
1,000,928
968,156
836,322
Total
Percentage
Contributed
130.0%
208.9%
132.1%
$
$
$
Life Insurance
Annual
Required
Percentage
Contribution
Contributed
152,118
214.3%
0.0%
74,559
387.2%